UK - UK trustees are "paralysed" in the face of solvency challenges posed by falling real yields, while their Dutch counterparts forge ahead with LDI solutions, F&C said in a statement today.
The firm said “pragmatic” Dutch trustees, operating in an environment where it is now mandatory for pension funds to set aside reserves to cover their liability mismatch, had recognised that a partial hedge was “better than doing nothing at all,” even if market timing or resources did not suit a full fund-wide immunisation.
According to F&C, awareness of LDI solutions is on the rise across Europe. Richard Watts, F&C director of asset liability management, said: “Falling equity markets have reduced fund net asset value, and lower bond yields have caused the value of liabilities to increase faster than fixed income assets in most funds.” Watts added that LDI was not simply a case of reducing risk, and that it was essentially concerned with approaching an investment from the point of its liabilities, rather than trying to maximise returns on assets without concern for the risks of meeting those liabilities.
He said a range of mechanisms could be employed to implement such strategies. At the most basic level, this would be to match the liabilities with physical fixed income assets, he said.
Alternatively, Watts thought trustees might consider a more return-focussed approach which would involve investing the assets in equities, property, fixed income and alternative investments, while hedging any residual duration risk with derivatives, or LDI pools. By Lisa Haines
This week's top stories included Cardano announcing plans to acquire Now Pensions from a Dutch pension fund later this year.
Royal Bank of Scotland (RBS) faces a £102m impact on liabilities as a result of equalising guaranteed minimum pensions (GMPs), according to its annual results.
Malcolm Mclean says getting the channels of communication right and engaging more openly is a good starting point